US-China trade war worries worsen as Trump seeks grand bargain

By Andrew Hammond

Worries are growing over a potential U.S.-China trade war. With Washington poised to impose tariffs on some $34 billion of Chinese goods, the Trump team is also considering soon placing new restrictions on Chinese ownership of U.S. "industrially significant technology" firms, and enhanced export controls on technologies shipped to China.

Given the massive stakes in play, this latest bout of turmoil between the two players has the potential to severely disrupt what is probably the world's most important economic and political bilateral relationship. While a full blown U.S.-China trade war is still not inevitable, prospects will increase significantly if tariffs are imposed.

As the U.S.-China conflict over trade has intensified, Beijing has increasingly sought to align itself with Brussels given that the EU is also currently in dispute on this economic front with Donald Trump.

Last Monday in Beijing, Chinese Vice-Premier Liu He and European Commission Vice-President Jyrki Katainen vowed to oppose U.S. trade protectionism asserting that unilateral actions risked pushing the global economy into recession. And in a further sign that tensions are coming to the boil, Europe reconfirmed that it will impose tariffs on around $3.3 billion of U.S. products in response to recent U.S. duties on aluminium and steel.

Trump is again placing great emphasis on his personal skills of negotiation to resolve these issues. He asserted, "We have started the process and I think that will work out with China because we have a very good relationship with President Xi Jinping. He is incredible."

Yet, despite Trump's optimism here, it is by no means certain that Beijing will play ball with Washington. And this despite the current upswing in ties between the two superpowers which has seen significant cooperation on North Korea, for instance, lead to the Singapore summit June 12 between Trump and Kim Jong-un.

For underneath this apparent success of U.S. and Chinese diplomacy and coercion in bringing Kim to the negotiating table, bilateral ties remain mixed and it is unclear how much personal chemistry Trump and Xi have in practice. This is relevant as, while economic and security fundamentals will largely determine the course of ties in coming years, personal warmth between the two leaders could also be crucial.

During the Obama presidency, the fact that bilateral relations remained generally cordial reflected, in significant part, the personal commitment of Barack Obama and Xi to stability. Both recognized the super-priority of the relationship, and Washington pursued a strategy that promoted cooperation on softer issues like climate change, while seeking constructive engagement on vexed, harder issues such as South China Sea tensions.

Meanwhile, Xi outlined his desire to fundamentally redevelop a new type of great power relationship with the United States to avoid the conflictive great power patterns of the past. This is an audacious goal, which still lacks any obvious definition, and it is not certain how long the pledge will remain in place given the frequent bellicosity of Trump to China.

While Trump is quite often warm in his rhetoric toward Xi, personally, it is clear that he genuinely believes China is a major threat to the United States. This is not only true on the economic front, but also the security domain too: Much of the U.S. president's anti-Beijing rhetoric appears to be based on a conviction that China represents the primary threat to U.S. interests globally.

Outside of North Korea, a string of security issues still cloud the bilateral agenda, including the South China Sea. This topic frequently brings frustrations for both sides and last year even the comparatively moderate-mannered former U.S. secretary of state Rex Tillerson said Beijing should "not be allowed access" to its new, artificial islands there, a sensitive comment given China's animus toward U.S. sea and air maneuvers near its borders.

Yet, it is economic disputes that are currently at the fore of the bilateral relationship. While praising Xi, Trump recently asserted that "China … has been very tough on our country … We probably lost last year 500 billion U.S. dollars in trade to China. Think of it: 500 billion."

It is this narrative that Trump has repeated many times since the 2016 U.S. election. As well as his concerns about U.S. trade deficits and purported U.S. job losses that come from this, he has repeatedly called Beijing "grand champions of currency manipulation," asserting the country is keeping its exchange rate artificially low in order to secure export advantage.

On the face of it, therefore, rising tensions between Beijing and Washington appear very likely in coming weeks. Yet such is the mercurial nature of Trump, it remains genuinely unclear how far he will now up the ante with Xi.

Ultimately, he needs to show his U.S. political base some concessions from China on these issues to seek to fulfill his "America first" agenda. Here he has previously asserted that "everything is under negotiation," and what he ideally favors _ building on the recent diplomacy with Xi over North Korea _ is a wider grand bargain with Beijing extending beyond the economics arena, where one of his key demands is to see the Chinese currency floated, to other security issues too.

If such a deal can be pulled off, it would potentially provide for greater overall stability in the world economy and limit damage to the currently creaking international trade system which risks being undermined further by a major U.S.-China spat. An agreement of this kind could also have a broader positive effect on international relations, helping underpin a renewed basis for bilateral relations under the Trump presidency into the 2020s.

Andrew Hammond (andrewkorea@outlook.com) is an associate at LSE IDEAS at the London School of Economics.